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The vanishing act of IPO funds
Wed, 13 Apr Pre-Open

The evolution of capital markets in India has had its share of hits and misses. On one hand investors have got access to one of the most technologically advanced platforms for investing. On the other they have been the victims of scams and misleading investment advice. In fact not every company coming to the market for raising money has kept investor interests in mind. Initial public offerings (IPOs) have particularly been notorious in this regard. Including some of the most high profile offerings.

As per the regulators more than 750 companies have vanished in the past decade after raising capital either by way of capital or debt. Even for the seemingly well planned offerings, it often turns out that the promoters change the mandate for using the capital post issue. The same either gets diverted to less remunerative segments of the business or helps the promoters channelize a larger pie of earnings to their own kitty. The latter is done by investing in group companies that are more privately owned.

The government has now taken note of this and asked for better reporting of the end use of IPO funds. The diversion of IPO money to other accounts in particular will be under close scrutiny. Given the quantum of money raised through public issues alone in recent times, the matter needs its due importance. The funds raised through IPOs tripled to Rs 593 bn in 2010 from Rs 200 bn in 2009. The figure is estimated at Rs 900 bn for the current year (2011). Any misuse of funds of such order can therefore not just deal a blow to investor returns but also impact appetite for primary market issuances severely.

The Registrar of Companies (ROC) is the body mandated to keep a closer watch on the execution of IPO plans. However, it is for the SEBI to ensure that companies remain answerable to shareholders for subpar returns from new projects or change in business mandates. Many issues come into the market purely to offer exit routes to anchor investors or to repay debt. Such cases rarely turn out to be value accretive to the IPO investor. Hence, the IPO funds that do not have the backing of a business plan other than these need to be kept under vigilance. All said the vanishing acts of the IPO funds need to be averted at all costs to ensure investor confidence in the primary markets.

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